Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2018 conference call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After a short introduction, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication and broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Balzarini, CEO. Please go ahead, sir.
Yes, good morning to everybody, welcome to this Q&A call. As we do it typically for Q1 and Q3, we provided this morning with the Q3 results, which contained updates on our letting activities, on our development projects, on valuation changes which happened in the quarter, we updated our guidance with regard to the vacancy, lowering it to year-end expectations to 5% and confirming our EBITDA guidance at CHF 240 million. I think this is, in our view, a good set of results, especially the reduction of the vacancy guidance, which comes really much in line with letting activities, is something which we were working for and looking towards. Therefore, I would open to Q&A call now and leave all the other statements for later.
We will now begin the Q&A session. Anyone who wishes to ask a question may press star one on the touchtone telephone. You will hear a tone to confirm that they have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. The first question comes from Gisela Burri, ZKB. Please go ahead. Mrs. Burri, we cannot hear you.
I'm sorry. This must have been a mistake. I didn't press star one on purpose. I'm sorry.
No problem. Thank you very much. Next question comes from Robert Wierzbicki, Kempen. Please go ahead.
Good morning. This is Robert. Guidance for vacancy down, much appreciated. Can you tell us what is actually changing in the rental market? I'm referring to incentives, but also rents, and perhaps also very interesting to see where the demand is coming from. As a follow-up question, does this mean you want to go up the risk curve, i.e., starting new developments at spec or potentially buying more vacancies? This is the first part.
I think towards the mid-year, compared to the mid-year, the market didn't substantially change. We see a good demand at the central locations of Zurich. We see good demand picking up in Zurich West. The guidance improvement from mid-year towards the third quarter comes predominantly from a letting success in the Richtipark, lettings in the Grossmünster tower, and several lettings in Geneva. I think this is a continuous result of our improvement of our focus or, and I would also say, of the determination of the asset management and property management and the letting team. With regard to the incentives, especially in parts of the CBD of Zurich and parts of Zurich West, we see that we are getting a little bit more power. I would say you don't see that yet in change of incentives.
It's a bit of comfort that we have more potential tenants lining up, and therefore you are in a slightly better position in negotiation. I wouldn't say that that changes yet the landscape of the incentives, which are not dramatic, so unchanged, I would say, compared to the half year. The demand comes from a variety of sectors. Clearly in Zurich, it's a technology-affine sector. Also, healthcare, it's university, it's still banking. In Basel, continues to be pharmaceutical, and we are signing always very diligently, but we're signing also some co-working spaces where it adds flexibility to the building as we did it in the Grossmünster tower during the third quarter. With regard to the question of the risk curve, clearly no. I think we continue on our path on trying to work on the vacancy, try to anticipate expiries.
As you know, we have continuous expiries of 20%-15% of our book, and we have our development pipeline. We will continue to execute diligently. Plus, we are working on a few projects we have in the portfolio, and we should eventually be able to release a bit of information with the full year results of 2018, we are definitely not moving up the risk curve.
That is clear. The question is, why? If I see where the demand is coming from, and you mentioned actually pretty much the entire economy or almost. You could argue that it's quite a widespread extra demand. What would not be a reason to go on the risk curve?
Well, if we look at the few development projects which we look, we have still the impression that you're not paid for the risk.
Okay.
That the yields are still very low. If you move up the risk curve, you should also be paid for that extra risk you take, that's something we are not really observing in the market.
Okay. Actually, you see that, I reckon pension firms and insurance companies are also willing to go higher up the risk curve and underwrite more aggressively than you.
Well, one has also to say there are not so many transactions either. I wouldn't say that in that way, it's just that I think the market is improving, but it's not so strong and the returns are not there yet, where one would say, "Well, it's worth to go this extra risk," in the cases we observe.
Okay. If you look at the transaction market and more generally talking about the delta between 2017 and 2018, is there more activity? Are you offered more transactions or is it pretty much same old and still very limited?
No, it's similar to 2017. We are looking at a few opportunities, but it's still not a very liquid market because it's easy to know that the owner of the assets, they have an issue with what is the alternative use of the capital. I think the appetite to dispose and to realize is there, but the problem is where to invest the funds. That triggers clearly that good assets and good locations are still scarce.
Last question. One of the goals for you was lowering the vacancy. Now you're expecting to get 5% at the end of the year. Pretty close to, I would say, some kind of a structural vacancy level. What will be the focus, let's say, beyond 2018 for you?
As I said at the beginning, clearly the aim was to reduce the vacancy. We always said we want to reduce the vacancy on a diligent and intelligent way. I think we have still vacancy in the portfolio. We have expiries, which might add some vacancy. We have our development projects. We don't feel under pressure to invent something just for doing something. We continue on our path. I think that the geopolitical environment is also not so bright that you can go really in other directions. We continue to focus on our work. With regard to 2019, we will communicate with our 2018 full year results.
Excellent. Much appreciated. Thank you very much.
Thank you, Robert.
The next question comes from Ken Kagerer of ZKB. Please go ahead.
Yes, good morning, everyone. I would have three questions. The first one is also related to vacancies. How much of the reductions are due to the sales and the expected sales of buildings in 2018? Where do you see the structural vacancy going forward? The colleague assumed that 5% would be it, I guess you could get lower, but what's your view there? Thank you.
With regard to sales, we communicated already beginning of the year that the building in Geneva contributed roughly one, 1.2 percentage points to the vacancy reduction. You have Bernerstrasse Süd, which will add roughly 0.2 percentage points, that's about it for this year. Depending if Fribourg is going to be sold in the first quarter of next year, this will add also a few basis points to the vacancy reduction. The big part was Avenue des Morgines in Petit-Lancy, Geneva, which we also, I think, clearly communicated the mid-year. With regard to the structural vacancy, I think on a seven and a half billion portfolio, we always said that there is a structural vacancy of 5%-6%. I think important is that we showed that we are able to reduce it, that we can explain if vacancies goes up, why they go up.
You can never exclude that vacancy goes up 1%-7%. Important is that we can explain it, that we show the measures to bring it further down. Not saying that I have evidence now that we'll go up there. We always said a portfolio like ours should have a structural vacancy on average of 5%-6%, which demonstrates the quality of the portfolio.
Okay, thank you. The second one is relating to co-working spaces. We're hearing more and more that the new tenants for many property owners are co-working spaces. What are the risks related to that? Did you see some areas where they didn't perform so well?
Yeah. I think one has to be a bit careful and differentiate when we talk about co-working tenants. Especially, it's a phenomena which in Switzerland is not yet so strongly present compared to the observations you have, perhaps more in the Anglo-Saxon world. We have a few relationships with co-working providers, which goes from serviced offices, high-end serviced offices to communities. These are typical lease agreements on a fixed-term basis, 5 to 10 years at market rents with no turnover, and clearly the usual guarantees you would have with another tenant. One could argue that there is an imbalance between our engagement with the tenant, which is on a 5 or 10-year basis, and engagement of the tenant with his clients, which is then on a one, three, or six-month basis. I think this is a fair statement.
This is something which we clearly monitor, and we consider what is the business model and what is the survival change of that business model in that area. We look at it as a business, as a tenant, which has a value add also to building, but which has to be profitable in itself. That's a bit the judgment we take with every tenant. We see it really as a flexibility to the building, and we don't have lease agreements where you have only turnover basis, where you have provided full fit out, and you go into the risk.
We said mid-year also that we have, in the Richtipark in Wallisellen, a situation where we have a lower base rent and a step up and a turnover base because we wanted to bring in movement in that area, and we see that there is an increased demand. In those situations, you can go with that route, but we are very careful on with whom we work, on what terms we work, and what the business model is. On the portfolio, we are still in a 1%-2% rental income phase compared to the whole client base. Pretty marginal.
Thank you very much. The last one is actually related to stage 1 of Bahnhofquai/Platz. You were writing there that the buildings will be restored based on the previous appearance. Does that mean the inside of the building as well, or where does this discussion currently stand? Is it finalized now, or can you increase the floor utilization or anything like that? If there would be any updates, that would be appreciated. Thank you very much.
Yes. Thank you, Andreas Kauer. Well, we send out the property news. If you reach back that we should be able to keep the facade and that we will rebuild the building. Once we are able to go in, clearly together with the building protection authority, we will see what can be kept and what is still there and what can be rebuilt. At the end, the building will be most likely inside modern or more modern and more efficient. On the other hand, we have a lease agreement, a tenant agreement, which we intend to fulfill. Therefore, I would say we should have pretty much the same building as before, one and a half years later from today's perspective.
Thank you very much. Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from Marc Bies, Maerki Baumann. Please go ahead.
Good morning. My question is about the delay in rental income from the Bahnhofquai site. Is there any insurance covering for the delayed rental income or how we have to handle this topic? Thank you.
Yes. Thank you, Marc. It's also something, if I recall well, we said mid-year that we have a with the announcement of the fire, not mid-year, but in August, that we have an insurance covering clearly the building, the site, and we have a business interruption insurance. Which covers the loss of rental income of that building for a period of time we should fit to delay, we currently envisage of the rebuilding.
We can take into account the expected rental income then?
Under the assumption that we are able to restore the building in the time frame we currently envisage, yes.
Okay. Thank you.
Thank you.
Once again, to ask a question, please press star and one. Mr. Balzarini, there are no more questions.
Well, thank you all to everybody. I appreciate these questions. I think that we have the opportunity to have this Q&A call, and I wish everybody a successful year-end rally. Merry Christmas and a happy New Year. We might be the first saying that. Talk to you all in February. Thank you. Bye-bye.
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